Thursday, April 06, 2006

The 640 billion dollar question

640 billion - that is the latest estimate of cash piled up among non-financial S&P 500 companies, and it is growing everyday. If you include financial companies, and expand to companies outside the 500, the amount is ofcourse much larger.

Add to this the amount with private equity investors - estimates range from 500 to 800 billion. Note that private equity groups have a much larger amount to put to work in deals with leverage. All in all, the most conservative estimates of such investable cash show a figure around 3 trillion!

So, while consumers are going further down the debt hole, corporate entities are sitting on the largest cash pile ever. This holds true for companies in Europe and Japan as well.

What has been the effect of this mountain of cash so far ? One clue - I read recently that last year more money was put to work by companies buying back their own shares than all of the money invested via mutual funds (I do not remember the comparison exactly - so please correct me if I got this wrong).

In addition, even companies that have cash can easily raise cash in the corporate bond market. This is exactly what Oracle and Cisco did recently, to fund their acquisitions of Siebel and Scientific Atlanta. In both cases, the buyers had enough cash to fund the purchases. Oracle has around 8 bilion in cash, and Cisco has around 14 billion! In fact, some observers see the Fed rate hikes as being aimed at breaking the corporate bond bubble and not the real-estate bubble.

What will happen to all this cash ? Buybacks will continue, but that is an ineffective use of cash, especially when the buybacks seem to just offset executives' gigantic stock grants and the eventual dumping. I am hoping to see more generous dividend hikes, and one time payouts. And ofcourse, when companies finally come out of their shells, we will see an all-out takeover bubble - I can't wait for it!